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Senate Action Shows Difficulty of Cutting Deficit (Update2)

Jan. 27 (Bloomberg) — The U.S. Senate’s defeat yesterday of a plan to create a special debt commission shows how difficult it will be for Washington to chip away at the federal government’s trillion-dollar deficits.

The chamber rejected the push by some lawmakers to establish a panel whose recommendations on reducing budget shortfalls would be guaranteed floor votes in the House and Senate. The Senate vote in favor of setting up the commission was 53-46, with 60 votes needed for passage.

Public opinion polls have shown rising concern over the government’s red ink, and President Barack Obama will propose his own spending-reduction measure tonight in his State of the Union address. Yesterday’s Senate vote coincided with a new government report projecting that this year’s deficit will total $1.35 trillion.

Still, the commission proposal died amid complaints about the tax increases and spending cuts it might produce and that it would usurp the duties of congressional committees.

“People are more interested in protecting their programs, their areas, their political prerogatives than they are in dealing with the deficit and that’s just the way it is at this moment,” said Stan Collender, a former analyst for House and Senate budget committees.

Debt Increase Issue

A number of lawmakers who remain focused on deficit reduction are using the push to pass an increase in the federal debt limit to press their case. The Senate is debating a measure that would boost the legal limit on government borrowing by $1.9 trillion, to $14.3 trillion. The increase would probably be enough to accommodate borrowing for the rest of this year.

Democrats will need all 60 votes they control in the Senate to pass the increase unless they can peel off some Republicans. In exchange for his support of the increase, Senate Budget Committee Chairman Kent Conrad, a North Dakota Democrat, is demanding that an administration proposal to create a debt panel through an executive order resemble the one rejected yesterday.

Conrad wants assurances that the panel’s recommendations would get floor votes and be shielded from amendments that could kill any deficit-reduction package. Senators Claire McCaskill, a Missouri Democrat, Jeff Sessions, an Alabama Republican, and others are pushing an amendment to establish binding caps on the government’s discretionary spending that would require 67 votes in the 100-member Senate to waive.

‘Blue Dog’ Democrats

In the House, a number of “Blue Dog” Democrats who favor deficit reduction have said they won’t vote for the $1.9 trillion debt increase unless Congress carves its frequently waived “paygo” budget rules into law. Under those rules, the costs of tax cuts or spending increases are supposed to be offset with savings elsewhere in the government’s budget.

The White House said today in a statement that it “strongly supports” the paygo measure, which is scheduled to be voted on tomorrow by the Senate.

The nonpartisan Congressional Budget Office yesterday outlined its $1.35 trillion deficit estimate for 2010, equivalent to 9.2 percent of the economy. That would be the second biggest since World War II, after last year’s $1.4 trillion shortfall.

The agency warned that annual interest payments on the debt are “poised to skyrocket” and triple to $723 billion by 2020.

CBO Director Doug Elmendorf told a congressional panel today it is difficult to know how much debt is too much. That will be determined by whether investors are willing to buy government debt at ordinary interest rates, he said.

‘Get Away With It’

“We are a large and rich country and we can get away with a lot for a while. At what point we can no longer get away with it, as I said, is very difficult to judge,” Elmendorf told the House Budget Committee. “We’re moving into territory that most developed countries stay out of.”

There is a “fundamental disconnect between the services that people expect the government to provide, particularly for benefits for older Americans, and the tax revenues people are prepared to send to the government to finance those services,” Elmendorf said.

That “will have to be addressed in some way if the nation is to avoid serious long-term damage to the economy,” he said.

Obama tonight will propose freezing some discretionary spending for three years, though those programs represent only about one-eighth of all federal spending. The administration hasn’t said whether it also plans to call for cuts in benefit programs such as Medicare, slow defense spending or increase taxes. It plans to release its budget proposal for the upcoming year on Feb. 1.

Medicare, Medicaid

The biggest deficit drivers over the long term remain Medicare, Medicaid and Social Security, which the commission plan rejected by the Senate was designed to address.

Groups including the AFL-CIO, AARP and NAACP opposed the commission out of concern that it would result in cuts to the federal benefit programs. Meanwhile, groups such as the anti-tax Americans for Tax Reform expressed concern the panel would produce tax increases.

In yesterday’s vote, 22 of the Senate’s 58 Democrats, 23 of its 39 Republicans and one of two independents opposed the panel. Many of the foes protested that under the plan, they wouldn’t be able to amend the commission’s recommendations.

“There is no doubt that we have to get our fiscal house in order,” said Senate Finance Committee Chairman Max Baucus, a Montana Democrat. “The question is: What’s the best way to do it?”

To contact the reporter on this story: Brian Faler in Washington at bfaler@bloomberg.net